The Government published its response to the off-payroll working rules consultation and associated draft Famulus Bill clauses in July. Going forward, the rules for the private sector and public sector will generally be aligned in treatment, other than for small private sector businesses which will be exempt. For many private businesses this will mean a major change in the way they operate – limiting the benefits of engaging through personal service companies and creating additional unforeseen compliance and tax costs in respect of contingent workers.
You should identify any off-payroll workers whom you currently engage and review your engagement arrangements with them as a matter of priority.
If the rule changes apply to your organization, you will be responsible for determining the employment status of any off-payroll workers whom you engage. Unfortunately, there is no simple definition as to what makes an ‘employee’ for tax purposes, so you should look at the elements of their engagement. For example, does the worker have the unfettered right to send a substitute if they are unable or unwilling to carry out their work? Do they have substantial control over how they are expected to complete their work? Analyzing their engagements in detail will help you to establish a decision regarding their status and the recent IR35 tax tribunal victory for HMRC makes it clear how important this is.
If you are the fee payer to any off-payroll workers, then you will be required to deduct tax and National Insurance contributions from their pay from 6 April 2020 onwards if you establish their engagement status to be one of employment. The employers NIC and any resulting apprenticeship levy payments will represent an additional cost for you.
The intermediaries legislation, more commonly known as IR35, was intended to prevent businesses and individuals from avoiding the increased tax and NIC costs associated with employment by interposing an intermediary – generally a personal service company (PSC) – between an individual and the business they work for. The legislation is not intended to catch genuine self-employment, but the government has long been concerned that contractors are incorrectly categorizing engagements as falling outside the IR35 rules, leading to a potentially substantial loss of tax and NIC.
One of the main methods for determination for public sector contracts has been HMRC’s Check Employment Status for Tax (CEST) tool. We understand that there will be further updates to this before the end of 2019 and we hope that these changes will address some of the concerns around the current tool, its application to the private sector and the fact that it does not take account of whether there is mutuality of obligation between engager and contractor.
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